IP: ITC foreign-based misappropriation of trade secrets actions

Last fall, the Federal Circuit’s decision in TianRui Group Co. Ltd. v. ITC lit up the blogosphere. In TianRui, a case of first impression, the Federal Circuit held that Section 337 of the Tariff Act gives the International Trade Commission (ITC) the authority to restrict the importation of goods produced through the misappropriation of trade secrets, even if the acts of misappropriation occurred abroad. The rationale for this rests with the ITC’s statutory authority over “unfair methods of competition and unfair acts in the importation of articles…into the United States,” as provided by Section 337(a)(1)(A). Commentators opined that similar ITC actions were sure to follow.

The recent filing of an ITC complaint in In re Certain Rubber Resins has made those predictions come true. The Rubber Resins complaint tells a captivating story of international intrigue and corporate woe and serves as a cautionary tale for companies in the increasingly competitive global marketplace, particularly those manufacturing products in newly industrialized or developing countries.

Complainant SI Group, Inc. arrived at the ITC after trying to prevent ongoing China-based misappropriation of its trade secrets in two different forums in China. Along with TianRui, China’s inability to offer SI Group an effective outlet to resolve its misappropriation claims certainly appears to have played a part in SI Group’s decision to file in the ITC.

Rubber Resins’ players

According to the ITC complaint, complainant SI Group has been in business in New York, in one form or another, since 1906. Since its beginnings as a varnish manufacturer, the company has grown into a global developer and manufacturer of chemical intermediates and resins. SI Group does substantial manufacturing and research in the U.S. and also has manufacturing facilities around the world, including China.

According to the ITC complaint, among its products, SI Group has a “tackifier” resin that facilitates the bonding of layers of rubber used in tires and other rubber-based products. Over the last 25 years, SI Group has developed a process for creating its resin. SI Group maintains that it has taken multiple steps to protect the trade secrets involved in the process, including having employees sign trade secret acknowledgements.

SI Group began manufacturing its resin in China in 2004. SI Group employed Chinese national Xu Jie at its plant in China. When Xu became plant manager of the SI Group facility, the company trained him in its entire trade secret process for making the tackifier resin.

Xu resigned from SI Group in 2007. Though he denied he was going to work for a competitor, photographic and police record evidence eventually showed that he was working for Sino Legend. The ITC complaint alleges that Sino Legend found out about Xu because one of its affiliates had previously served as a sales agent and distributor for SI Group in China.

SI Group alleges that Sino Legend began manufacturing a tackifier resin chemically identical to SI Group’s in 2008. Sino Legend had not successfully made a marketable tackifier before then, but, after hiring Xu, it was able to get its product to market in a very short amount of time and eventually took over 70 percent of the Chinese market for tackifiers. The ITC complaint claims Sino Legend is now poised to try to take over the U.S. market for the resin as well.

Enforcement efforts in China

SI Group’s ITC complaint recounts the efforts SI Group has undertaken to protect its trade secrets in China. In 2008, SI Group contacted the Shanghai Public Security Bureau (PSB) to begin a criminal investigation against Xu. As part of that investigation, SI Group paid for testing of Sino Legend’s resin at a judicially authorized testing center in China.

According to the ITC complaint, the testing and investigation showed that the two companies’ products were virtually identical. The testing facilities report concluded that the similarities between the products and the manufacturing process and equipment used at Sino Legend simply could not result from independent development given the limited amount of time it took for Sino Legend to come to market.

Despite these findings, the PSB terminated its investigation and encouraged SI Group to drop its claims as well.

SI Group next filed a civil action in China. It took months for the Chinese court to get the PSB to turn over its evidence and report regarding Sino Legend’s resin. Sino Legend also denied that it employed Xu, and only admitted to employing him after SI Group obtained photographic evidence of Xu leaving the Sino Legend plant and a police registration he filled out naming Sino Legend as his employer.

SI Group claims that these delays required it to drop its original civil action in China in order to avoid a court-imposed case-closing deadline. It has since re-filed its action in China, but a decision has not yet been issued.

SI Group’s claims in the ITC

Using the TianRui decision as a guide, SI Group’s ITC complaint outlines in detail its alleged role in the U.S. domestic resin industry and the specific threats that Sino Legend’s alleged misappropriation caused its business. Invoking Section 337, SI Group is asking the ITC to conduct an investigation into the misappropriation of trade secrets and issue cease-and-desist and exclusion orders permanently banning the sale or importation of any Sino Legend resin developed using SI Group’s trade secrets.

Practical considerations and conclusion

SI Group’s ITC complaint serves as a cautionary tale of the risks associated with the increasingly competitive global landscape, particularly manufacturing of products in newly industrialized or developing countries. It further illustrates the importance of properly protecting intellectual property assets as trade secrets either in lieu of or prior to seeking patent protection.

There is no inherent or “natural” right or title in trade secrets absent proper stewardship. Indeed, the ITC will not consider information to be a trade secret where a claimant has failed to take reasonable efforts to protect that information. In simple terms, a trade secret is any information that:

Is not generally known in the industry

The owner has made appropriate efforts to keep secret

Confers a competitive advantage by being kept secret

The ITC often employs a number of factors in determining whether something is a trade secret. These factors generally include:

The extent to which the information is known outside of the business

The extent to which the information is known by employees inside the company/entity and others involved in the business

The extent of the measures a business takes to guard the secrecy of the information

The value of the information to the business and its competitors

The amount of effort or money the business expends to develop the information

The ease or difficulty with which other could properly acquire or duplicate that information

In short, the standard for trade secret protection is lower at the outset than that required for patent protection (i.e. inventions) but more is required of the claimant over the course of the life of protection if the claimant wants to maintain the information as a trade secret.

While China and other newly industrialized countries have offered multi-nationals manufacturing savings and other potential benefits, those savings and benefits sometimes come at a very substantial cost. Newly industrialized and developing countries’ apparent appetite (or lack thereof) for policing theft of trade secrets within their borders will continue to influence the future number of trade secret misappropriation actions filed in the ITC—and whether the availability of an ITC remedy is enough of an insurance policy to risk manufacturing in a newly industrialized or developing country at all. With the ever-continuing importance of intellectual property as an asset to a company’s business and the increasingly competitive global landscape, the importance of adequately and vigorously protecting that intellectual property is all the more critical.